FOREX-Dollar rebounds in volatile trade as hawkish Yellen prevails

NEW YORK, Aug 26 (Reuters) - The dollar rallied to a two-week high against the yen and Swiss Franc on Friday in volatile trading as investors focused on Federal Reserve Chair Janet Yellen's comments on an improving U.S. economy that bolstered the case for an interest rate increase.

The U.S. currency had given up gains soon after Yellen spoke to central bankers, as she gave no indication that a rate hike was imminent. The dollar, however, then rose as traders re-assessed her words and took into account hawkish remarks from Fed Vice Chair Stanley Fischer.

Fischer said on CNBC TV that the Fed was still on track to raise rates this year.

"Yellen is a pre-disposed dove. When a pre-disposed dove tells you that the case for a rate hike has strengthened, you respect that, especially if it's coming from the Fed chair," said Mazen Issa, senior FX strategist at TD Securities in New York.

"Her comments were reinforced by Fischer. Both Yellen and Fischer generally walk the same path. I think that was the lynchpin that catapulted the dollar."

At a gathering of central bankers from around the world in Jackson Hole, Wyoming, Yellen said improvements in the U.S. labor market and expectations for moderate growth have boosted the case for a rate rise.

Futures markets late on Friday priced in a 36 percent chance that rates will rise in September, from 24 percent right after Yellen's comments, according to the CME's FedWatch. For the Fed's December meeting, the probability rose to more than 60 percent, from 57 percent in morning trading.

Friday's data on the second estimate of U.S. gross domestic product was put on the back burner following Yellen's statement. That report showed U.S. growth in the second quarter was slightly lower than previously thought, rising at a 1.1 percent annual rate. That was down slightly from the 1.2 percent rate reported last month.

There were positive elements in the report, though, such as the upward revisions in consumer spending and an improvement in business investment figures from the preliminary estimate.

In afternoon trading, the dollar index, which measures the greenback versus six major currencies, rose 0.8 percent at 95.563. Earlier, the index hit a 10-day high.

The dollar rose against the yen to a two-week high of 101.93 yen and was last up 1.3 percent at 101.88 yen.

Against the Swiss franc, the dollar gained 1.2 percent to 0.9788 franc, while the euro fell 0.9 percent to $1.1180 . (Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Sam Forgione in New York; Editing by James Dalgleish and Dan Grebler)